Last week I laid out a schedule of sorts for my posts over the next few weeks. This morning I’m flipping that around a bit to talk about the SECURE Act 2.0 that was passed by Congress and signed into law during the wee hours of last year. I’ve been spending time in recent days going through the details, so it’s all very top of mind right now.

The original SECURE (Setting Every Community Up for Retirement Enhancement) Act was signed into law near year-end back in 2019 and disrupted the field of retirement planning. For example, the original Act included about ten major provisions like taking away the ability for non-spouse IRA beneficiaries to “stretch” required minimum distributions (RMDs) over their own lifetimes. These stretch provisions had been the go-to for years. Instead, the time limit became ten years and a whole bunch of complexity was added. The Act also bumped the starting age for RMDs to 72 from 70.5.

SECURE Act 2.0 had been talked about ever since and almost became law at least once before being watered down a bit in some ways for final passage. With this legislation we’re seeing a broadening of the retirement landscape amid maybe 100 provisions and more complexity. Interestingly, many of the changes will roll out over the next several years and some aren’t available in the marketplace yet because the financial industry needs time to respond. And as often happens anyway, Congress will weigh back in to fix mistakes that are inevitable within about 400 pages of text. So, the Act’s planning implications will unfold over time.

There’s a ton of detail so I’m going to list the points and some notes that I think are most relevant instead of bludgeoning you with all the small stuff.

RMDs -

Required Minimum Distributions now begin at age 73 instead of 72. So if you’re turning 72 during 2023, you can wait until next year to start your RMDs. Here are the age ranges:

If you were born before 1951, there’s no change – you’re still required to take your RMD.

If you were born during 1951 – 1959, your starting age is 73.

And if you were born in 1960 or later, you’ll start taking RMDs at 75.

Penalties for missing your RMD will drop from 50% to 25% of the amount you were supposed to take. And most people will pay only a 10% penalty assuming they correct their mistake quickly.

If you’re charitably inclined you’ll still be able to make Qualified Charitable Distributions from your IRA once you’ve hit age 70.5 (the actual age and not a day earlier). QCDs are generally a more tax efficient way to gift, especially if you’re taking RMDs.

Waiting to take your RMD can and usually does make good sense in the near-term from a tax perspective, but it also delays and potentially compounds the tax problem down the road, especially for those who can wait until 75, by compressing a higher balance IRA into a shorter life expectancy and larger RMDs. QCDs help because the money is obviously no longer in your IRA and subject to RMDs because it’s been gifted away. Roth conversions help too by moving the money from your regular IRA to a Roth, from which RMDs aren’t required. The details around Roth conversions are beyond the scope of this post, but we should definitely discuss conversions if you’re now waiting until 73, or even 75, to start your RMDs.

Starting next year surviving spouses will be allowed to treat their late-spouse’s IRA as their own (the current rule) or they could play the role of the decedent, so to speak. This could work in different ways but, for example, an older person loses their younger spouse, inherits their IRA, and then takes smaller RMDs based on their late-spouse’s life expectancy. Doing so would save some taxes versus merging the inherited account with their own and taking RMDs on everything based on their own life expectancy.

401(k) Updates –

First, let me say that there are multiple types of retirement plans, but for brevity I’m focusing primarily on the 401(k) since it’s more prevalent.

If you’re still working past RMD age and have a Roth 401(k) at work, you won’t be required to take a minimum distribution from it. The benefit here should be obvious, but this provision starts next year.

Employers can make matching and profit-sharing contributions to a Roth, whereas previously it was only to the employee’s Traditional 401(k) balance. The catch for the employer is these dollars can’t have a vesting schedule attached, but the details of how this will actually work still have to be ironed out.

And for employees over 50 with at least $145K of wages, starting next year catch-up contributions will have to go into a Roth. In other words, the extra money an older employee gets to save wouldn’t be saved pretax. These details need to be clarified too.

Also regarding catch-up contributions, in 2025 those who turn 60, 61, 62, or 63 can add an extra catch-up amount. Maybe $12,000 versus $10,000 currently.

The Act also created a Roth SIMPLE and a Roth SEP. The industry has to respond because these account types don’t exist in the real world yet. Maybe this opens up soon or later this year, I’m not sure. But this is a big benefit since SIMPLE and SEP plans have for years been the oddball by not containing Roth provisions like a 401(k) does.

529 Plans –

If you’re not yet getting the sense that Roth accounts are favored, get this: A portion of unused 529 Plan balances can be rolled into a Roth IRA tax free. There are lots of details here, such as a limit on how much can be moved each year and a there’s lifetime max of $35,000. The 529 Plan also has to have existed for at least 15 years and contributions from the last five years aren’t eligible. The Roth IRA also has to be in the name of the 529 Plan beneficiary, which can be changed prior to moving the money.

Other interesting updates –

There are a host of provisions allowing different groups to withdraw money early from their workplace plans without penalty. Other provisions are for those suffering from domestic violence, a natural disaster, or who simply need cash in an emergency. If so, this “emergency” category will allow folks to take a relatively small distribution of up to $1,000 per year penalty-free that could be paid back to avoid taxes.

The thrust behind this last point created a new type of savings account for workplace plans that will, I suppose, sit beside a 401(k), only be invested conservatively, and would allow for pretax contributions and matching contributions from the employer. This seems an interesting attempt at keeping people from treating their long-term savings like an ATM.

For those with disabled adult children, starting next year ABLE accounts can be opened until age 46 versus the current limit of age 26.

Again, all this and more is brand new. The practical details will take time to emerge as Congress fixes errors, the IRS weighs in, and as industry responds. I’ll try to keep you posted along the way, but please let us know of questions.

Have questions? Ask me. I can help.

If the third quarter’s update wasn’t much fun to write, neither was this summary of the worst year for markets since 2008. But let’s push on and review major themes from Q4 and 2022, and the outlook as we roll into the new year.

Here’s a roundup of how major markets performed during Q4 and year-to-date, respectively:

• US Large Cap Stocks: up 7.6%, down 18.2%
• US Small Cap Stocks: up 6.2%, down 20.5%
• US Core Bonds: up 1.6%, down 14%
• Developed Foreign Markets: up 17.7%, down 14.4%
• Emerging Markets: up 10.3%, down 20.6%

Stock and bond markets staged a bit of a comeback during October and November before running out of steam as we closed out the year. Looking at all twelve months, the US stock market as measured by the S&P 500, had two other positive runs, one in March and again in July, but otherwise the mood was decidedly negative and that kept prices volatile all year. According to Bespoke Investment Group, 2022 had a near record number of days when the stock market was down at least 1%. Markets at home and abroad would often open in positive territory only to fall into the close – a tough grind.

Across sectors and looking at the whole year, Communication Services, Consumer Discretionary, and Technology led the way lower, falling by 38%, 36%, and 28%, respectively. Corporate names you know, such as Netflix, Disney, Meta (aka Facebook), Google, Amazon, and Tesla, all pandemic market darlings, turned sour during 2022. And Apple was down a relatively benign 26%, but it’s over $2 trillion size helped pull index performance down. All of the 11 sectors lost ground on the year except for Energy, which was up 62%. Interestingly, most of the worst performing sectors still beat Energy over a three-plus year timeframe, but that’s not much consolation for most investors given the sector makes up only 5% of the S&P 500. As market themes go, “value” finally beat “growth” after many years of being trounced by Big Tech and other growth-oriented stocks. There were few places to hide from volatility throughout the year but being diversified between these two themes helped soften the blow a little.

In a way, the most dramatic developments last year happened in the bond market. While core bonds clawed back some return during Q4, the main bond benchmarks were down from 4% to 40% (that’s not a typo) for the year, with the wide return disparity being due to bond duration, a measure of a bond’s price sensitivity to rising interest rates. Typical bonds in your portfolio are of medium duration and were down about 13% last year. So it helped that we kept our maturities and duration shorter, often below the market average, but there weren’t many places to hide in bonds either. These kinds of returns haven’t been seen in decades and happened quickly, primarily due to news about inflation and the Federal Reserve’s response to it.

After revving up in mid-2021 following a variety of pandemic-related issues, 2022 began with inflation averaging about 7%. By June it had risen to a little over 9% before tapering off to where we started the year, at least through November, according to the Bureau of Labor Statistics. That was a lot of inflation quickly and, arguably, declines from the peak were due to Fed policy decisions from about Spring on. Specifically, the Fed raised its short-term benchmark rate seven times last year, from a level of about 0.25% in March to about 4.5% at year’s end. Each increase was meant to incrementally slow the economy and takes time to do so. The Fed was caught off guard by how fast prices were rising and ramped up its increases and rhetoric. While still historically low in absolute terms, rarely has the Fed raised rates so much so fast. The Fed was and is trying to walk a fine line by slowing the economy enough to bring inflation down while not triggering a recession. So far the inflation part seems to be working but, again according to Bespoke, economic indicators are slowing rapidly. Only time will tell if a so-called soft landing is possible.

These interest rate increases also helped the yield curve, another recession indicator, to invert for much of the year. Inversions occur when investors accept lower returns on longer-term bonds than shorter-term bonds because they feel the short-term is more uncertain. Historically this means a recession is a year or so out, but the record is mixed. As we enter 2023, most analysts expect that we’re either in a recession now or we’ll see one soon with the only questions being how bad it will be, and which sectors of the economy get hit hardest.

Other issues from last year linger and continue to jump between foreground to background. Russia’s ongoing war in Ukraine from last February still roils commodities markets and nobody knows how long it will continue. Pandemic-era supply chain issues helped spur inflation and are largely resolved for some industries while the back-and-forth of China’s zero-Covid policy continues to add uncertainty. Consumers here and abroad are still buying but how long that can last at the current rate is an open question. And Inflation is expected to keep slowing into 2023 as the Fed continues to raise rates, another 0.75% is the current best guess based on its own projections.

But it’s not all doom and gloom. While it’s prudent to expect more volatility in the near-term, stock and bond prices will eventually recover as all this and more gets sorted out – they always have. In the meantime, look to your plans, ask questions, and remind yourself that you’re in it for the long haul. We’re here to help.

Have questions? Ask me. I can help. 

In recent weeks we’ve been covering some of the stuff you can and should be doing with your investments as we approach year-end. Today let’s add a final layer – the overall portfolio review.

Now, I’m of the opinion that you should be doing this frequently as a back-of-the-envelope check on things, especially during down markets. But if you’re only doing this once it might as well be at the end of the year.

Here’s the rough framework I use when reviewing a client’s portfolio.

• Have your needs changed?
  1. We’ve seen lots of volatility in all asset classes this year, even typical safe havens. This makes it tough to be a long-term investor. That’s obvious but it’s helpful to acknowledge the difference between how you feel about short-term performance and your actual financial situation.
  2. Have your financial needs changed recently? Have you retired from, lost, or gained a job? Have you received an inheritance? Has your health taken an unexpected turn?
  3. A “Yes” answer to any (and more) of these types of questions indicates the potential need to change your investment mix. At minimum it’s a good reason to talk with your humble financial planner to see what, if anything, you should be doing differently.
• How does #1 impact your investment decisions, if at all?
  • Maybe you’ll need cash soon for large expenses or just to get by.
  • Or maybe a new job or inheritance could let you save more.
  • Often, your needs haven’t really changed so there’s no meaningful impact to your investments. If so, you’ll want to be careful about making changes for the sake of making changes. I tend to look a lot more than I do.
• Then consider your investment allocation and portfolio structure. Is it still appropriate?
  • Assuming numbers 1-2 indicate no impact, and assuming you’ve been managing your portfolio for awhile and know the how’s and why’s of each investment, you can move on to basic rebalancing.
  • But let’s say 1-2 indicate a need for regular draws from your portfolio. Stock funds pay dividends quarterly and bond funds pay monthly. It can be helpful to turn off automatic reinvestment settings for your account to allow cash to accumulate. Then link your account to your bank and take money out on a schedule or as-needed.
  • Or maybe you need less money from your investments, or perhaps none at all. If so, ensure automatic reinvestments are turned on, especially in long-term accounts like Roth IRAs. This helps keep your money working while you’re not paying attention.
  • If you sense a mismatch between your allocation and your financial situation, look to make changes within your retirement accounts first. The reason is that you won’t have to worry about taxes when moving money between investments.
  • If you need to ratchet down your portfolio risk, a straightforward approach is to shift money from various stock funds into an index fund that tracks the S&P 500, or perhaps a variation that emphasizes dividend payers within the S&P 500. On the bond side, reduce the “duration” of the bonds in your portfolio while increasing credit quality. Duration is quoted in years and lower earns less over time but can be less volatile. This makes higher-quality lower duration bonds a good option for ringfencing spending money over perhaps a couple of years.
  • If ratcheting risk up instead, you can use the same S&P 500 index funds but just buy more. There are other asset classes such as emerging markets, preferred stocks, and junk bonds to juice up return potential, and all are at a discount right now. But each adds volatility too, so caveat emptor.
• What has and hasn’t worked this year and what’s the outlook?
  • The worst performing indexes so far this year include the NASDAQ, down about 29% and micro-cap stocks down about 22%. Large-cap indexes like the S&P 500 are down around 16%. Core bonds are down 12+%. What’s tough is that none of these areas are bad, they’re just down right now. In fact, stretch performance out over a 5yr period (or longer) and the order of performance gets reversed, with the NASDAQ up 89% over that timeframe including this year! Time in the markets works while timing them does not.
  • Your “dividend” funds are likely doing better, as are specific sectors such as Energy, Utilities, Consumer Staples, and Healthcare. Short-term and municipal bonds are doing better on their side of the fence too.
  • Because of this mixed performance there should be some decent rebalancing opportunities like we discussed a couple of weeks back.
  • For the outlook, inflation is slowly cooling down and the Fed is expected to raise rates just5% this week. A recession of some severity is still expected, but expectations aren’t as dire as a few months ago. That said, markets will continue be volatile until all this gets sorted out, likely well into next year.
  • You’ll want to stay invested and diversified because markets can and do rise amid all this uncertainty.
• Look at your investments for anything that stands out based on numbers 1-4 above. A common mismatch is long-dated and/or lower credit quality bonds holding short-term spending money. Or crypto variations used as a cash equivalent. Another is an unintentional overemphasis on a volatile asset class. Beyond that, if anything seems too confusing, duplicative, or expensive, now is a great time to fix the problem.

Managing investments is primarily an exercise in controlling what can be controlled. We double down on this in bad markets. Each investment in your portfolio should be there for a reason and the mix should make sense. If so, and your costs are low you can at least check the box for being diligent, whatever the markets may throw at you.

And you don’t have to worry about these details if we’re managing your portfolio – we’ve got you covered. As always, let us know of important changes in your life and ask questions.

Have questions? Ask me. I can help.

Good morning out there. We’re only into the second week of 2023 and already it seems like this will be another busy and eventful year. There’s lots of information that I’d like to share all at once. But in the spirit of brevity this morning’s post is a summary of more detailed content that I’ll be sending out over the next few weeks or so.

From Me to We –

My first inclination is to do things by myself. As you likely know, I left the brokerage world over eight years ago to start this firm on my own. I enjoy running long distances, often alone, and tend toward solo sports. It’s not “me against the world” or an ego problem (at least I hope not) that finds me preferring to work alone. I’m just wired for independence.

But of course that only gets you so far, and the complexities of business and life require more sets of hands.

My assistant-turned-paraplanner, Brayden, and I have been working together since 2018 and it’s been great helping him grow in his career. I’m happy to report that Brayden has just completed his relevant work experience requirement to become a Certified Financial Planner after previously passing the national board exam. Brayden will now be taking on more responsibility within the firm as a financial planner and in his place we’re bringing on a team of highly skilled virtual assistants. More to come on that and other operational details next week.

Secure Act 2.0 –

Just when you thought the Congress couldn’t tie its own Velcro… they passed the so-called Secure Act 2.0 and expanded the retirement savings landscape. This had been percolating for a while but snuck under the radar as part of an appropriations package that wasn’t signed into law until the final days of last year. I’ll be working on a better summary for a post a couple of weeks from now, but here’s some of the bigger news:

Required Minimum Distributions now begin at age 73 instead of 72. So if you’re turning 72 this year and were planning to start taking RMDs from your retirement accounts, you can wait until next year.

The main reason to wait is that it reduces your taxable income. Of course this only helps if you have other money to cover your spending needs. This isn’t the case for most people, but there are quite a few who are being forced into paying taxes unnecessarily due to the RMD rules.

These changes don’t impact folks who are already taking RMDs.

Another big change: if you were born in 1960 or later, your starting age is now 75.

Penalties for missing your RMD have been reduced from 50% to 25%, and perhaps to as low as 10% if you fix the problem quickly. In many ways the Act presents a kinder and gentler set of rules. More to come on this soon.

An update on I Bonds –

I Bonds were all the rage last year for good reason, at least superficially. The bonds pay an interest rate that gets reset as the Consumer Price Index (the generally accepted measure of inflation within the economy) changes. So it makes sense that as inflation was spiking, so would the rates on I Bonds, reaching as high as 9.6% last year.

But nothing is that simple for long. As inflation wanes so has the rate that I Bonds pay, currently about 6.9%. This sounds higher than the rates available on short- and medium-term Treasurys for example, of around 4.25% and 3.5%, respectively. (If those rates seem backwards, that’s an inverted yield curve for you.) Higher yes, but if CPI keeps trending lower I Bond rates will follow. They’re variable and are meant to be held longer-term, so we end up looking at an average rate over, say, five or more years that could be about the same as Treasurys.

So are I Bonds still a viable option for some of your hard-earned savings? The short answer is that it’s complicated. We’ll discuss that soon. In the meantime, the Treasury Direct website has a couple updated explainer pages that are pretty good.

https://treasurydirect.gov/savings-bonds/i-bonds/

https://treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/

Otherwise, I hope you and your family have been okay during the recent storms, flooding, power outages, and so forth. That’s a lot of water in a short time, so hopefully it goes a decent way to relieving drought conditions.

Have questions? Ask me. I can help.

Good morning,

I hope you and your family are doing well as we approach the end of another year. In many ways this year has been a great one. We’ve experienced laughter and love, the joy and satisfaction of accomplishments, and the optimism of new beginnings even amid loss.

But from a market perspective let’s hurry up and get the year over with, shall we?

As I’ve done in the past I’m taking the next couple of weeks off from writing this blog to spend a little more time with family over the holidays. I’m still hard at work for your benefit, of course, so let me know of anything last minute. Otherwise, I’ll be back to you on the first Tuesday in January.

Until then I wish you and yours Happy Holidays, and good fortune mixed with a little luck in 2023.

Have questions? Ask me. I can help.

Last week we touched on typical year-end topics like taking Required Minimum Distributions and how portfolio rebalancing can help free up the necessary cash. Now let’s look at an unfortunate reality for this year-end: harvesting losses.

If you’re like most investors your portfolio is probably showing some losses right now. And if you were paying attention you likely saw losses ebb and flow starting in about March. Even if you harvested back then or perhaps multiple times already it likely makes sense to look again. Markets have continued to struggle and, even though prices have recovered a bit in recent weeks, losses remain.

Take a look at this simple chart of four broad market index funds to see how there were several major lows where you could have harvested as the year progressed.

There are different schools of thought on this, but I think harvesting losses is worthwhile for two primary reasons: one, if done correctly harvesting losses lowers your household’s tax bill and this helps to indirectly increase your investment performance; two, for the most part we don’t have to worry about transaction costs, so the only direct cost associated with harvesting losses is your time. By the way, I think this last point feeds into some of the criticism (if that’s the correct word) of harvesting losses. It’s time consuming and requires holding a lot of details, and that often makes it difficult for some people, including professional money managers, to want to bother with it.

Here’s a primer on how this works. As a reminder, tax loss harvesting only applies to your individual accounts, trust accounts, and so forth, not to your retirement accounts. Ask your tax advisor (or me) for more details.

First things first – Why do we want to do this?

Losses in our investment accounts are unrealized (often called paper losses) until we sell and realize them. Nobody wants to lose money and eventually losses on high quality investments will turn into gains. But is it possible to reap some benefits from the low points along the way? That’s what loss harvesting is all about.

Say you bought $10,000 worth of a S&P 500 index fund earlier this year that’s now worth $8,000, for a $2,000 unrealized loss. This is a core holding and the fund is high quality, it’s just down with the market. What should you do?

You could simply hold the investment as a long-term investor should. There’s nothing necessarily wrong with that. But what about that unrealized loss… shouldn’t we try to find a silver lining? I say yes!

You do this by selling the investment (you can sell a portion but let’s assume you sell the whole thing) and not rebuying it for at least 30 days. You also shouldn’t have bought any shares during the prior 30 days. This is tracked by your brokerage firm and creates a 60-day window around whatever date you’re thinking about selling shares. Once you’re out for that long you have realized a capital loss and can use it to offset capital gains from other sales or those pesky taxable year-end mutual fund gain distributions. And if you have losses left at year-end you can use up to $3,000 as a tax deduction. Remaining losses carry over until fully used. In other words, losses are valuable at tax time.

While you’re welcome to sit in cash for a month or so after selling the investment, you can and should buy something else while you wait. And this is actually the goal from a portfolio management standpoint – to not rock the boat too much in terms of your investment mix. The tricky part is the new investment is essentially a placeholder that can’t be overly similar to what you just sold, or you risk triggering what’s called a wash sale and invalidating your loss. And this applies to all of your family’s accounts. No selling in yours and buying back immediately in your spouse’s account or selling in your brokerage account and then immediately buying back in your Roth IRA.

The details get complicated, but a simple approach to finding a placeholder is to change management style or regions. For example, if you’re selling a passively managed ETF like the S&P 500 fund, SPY, you could use an actively managed mutual fund that owns large cap US stocks. Or you could use a foreign ETF in place of a domestic ETF. It’s not perfect but keeps you invested. That way if markets rise during the month or so while you’re out of SPY you’re still getting some benefit. And if you own SPY in multiple accounts, remember that you’re only selling shares in your non-retirement account, so you still have exposure to the S&P 500, just less for a while. Worse case, you’ll have some gain when you sell your placeholder that uses up some of your harvested loss. But that’s a great problem to have, right? Or maybe markets continue to fall, and you harvest more losses when moving back into your original investment.

The thinking is similar with bond funds in terms of swapping management style and bond categories. For example, you could sell a medium-term bond ETF that is passively managed and that holds a lot of US Treasurys and swap for a medium-term CA municipal bond fund as a placeholder. This keeps your bond allocation roughly in line until you go back to your original holding. Maybe you decide to keep your placeholder for a while – there’s no rule requiring a roundtrip.

Again, there’s a lot of detail here and I’ve just scratched the surface. The point is that if you haven’t harvested this year I highly suggest taking a look at your unrealized gain and loss information prior to year-end. Or if you harvested months ago, take another look. Maybe you decide to do nothing. At least you’re making an informed decision.

And you don’t have to worry about these details if we’re managing your portfolio – we’ve got you covered.

Have questions? Ask me. I can help.